Enough noise to make your eardrums bleed

As readers may have noticed, I tend to take a “big picture” view of the equity markets. I do this because I am getting a bit older now and things like my hearing are precious to me, if only so that I can hear Mrs Halley “communicating” with me. This week is a classic case in point. I can’t imagine how many spreads the FOMO gnomes of New York (and other places) have crossed this week as stock markets have gyrated to a barrage of contradictory inputs. Ironically, it looks at this stage, as if the Nasdaq, S&P 500, and Dow Jones will all close roughly unchanged for the week as it closes.

The petrified tail-chasing we have seen this week as equity markets swing from “we’re all doomed, get me out,” to “I don’t want to miss the absolute bottom of the stock market, get me in” is perhaps indicative of the state of confusion out there. These sorts of periods of volatility usually happen before a big directional move. Markets are being buffeted by wars, inflation, slowdowns, overheating economies, supply chain disruptions, energy shortages and monetary policy moves etc. I know which way my money is placed, and I believe much of the gyrations are partly down to denial that after over a decade, the unlimited free money forever central bank QE spigot is being turned off around the world.

Overnight, it was Amazon and Apple’s turn to drive market direction, trampling over US GDP and PCE data. We’ll come back to that but turning to the double AAs, Amazon disappointed on earnings as it struggles with supply and cost increase issues and a cloudy outlook. Apple posted spectacular results, but in the ensuing press conference, warned of revenue hits from supply chain problems as well. Intel also released decent results but also warned of a challenging outlook. In extended trading, both Apple and Amazon stock was sold heavily, unwinding a part of the overnight recovery and pushing Nasdaq and S&P futures lower in Asia.

We should ignore equity markets and look elsewhere in the financial world for the true direction of travel, I believe. Oil prices rallied overnight as reports emerged that previously reluctant Germany and Hungary were getting on board with a ban on Russian oil imports. Gold held support at USD 1880.00 an ounce and has moved back above USD 1900.00. In currency markets, the low yield forever Japanese yen fell 2.0% while the greenback continued rallying versus both DM and EM currencies, notably the yuan. Rather oddly, US bond yields hardly moved for the second day in a row, perhaps girding their belts for next week’s FOMC. The rest of the price action though, suggests markets are moving to batten down the hatches for more turbulence ahead. That said, I will take price moves in Europe and the US today with a huge grain of salt, as we are month-end with the ensuing institutional rebalancing flows. Keep your eye on the prize and wear earplugs if necessary.

US GDP shrinks

Overnight, US Advanced GDP Growth for Q1 had a surprising fall of 1.40% QoQ. Meanwhile, Adv PCE Prices for Q1 rose by a more than expected 7.0% QoQ. Before you start looking up stagflation definitions again, the GDP numbers were heavily distorted by a build-up of inventories, distorting the import side of the equation. The production, export and consumption side buried in the number was very healthy. Q2 data should show a sharp rebound and the US economy remains robust. The key takeaway is that the data won’t detract the FOMC from a 0.50% rate hike next week. Tonight, we get actual US Personal Consumption and Expenditure, Core PCE Prices and the Employment Cost Index. All three have upside risks I believe, and robust data will be further ammunition for a hawkish FOMC next week.

In Asia today, we have had a few data releases already. South Korean Construction, Industrial Production and Retail Sales for March continued their softening trend. Blame it on a China slowdown/Covid-zero, or supply chain disruptions, but the direction of travel is slightly concerning. It won’t do the won any favours and South Korean officials have threatened to intervene today if the won falls too quickly. Philippines and Australian PPIs both rose by more than expected. That will weigh on the peso and highlight s the growth versus inflation quandary much of Asia will have to deal with this year. The PPI data will heighten pressure on the Reserve Bank of Australia to start its hiking cycle with a 0.15% rise next week.

Singapore Bank Lending held steady once again, but its PPI release this afternoon also has upside risks, and with the MAS six-monthly tightening passed, the Singapore dollar could come under pressure again. Germany, France, Italy and Spain release flash GDP Growth Rates for Q1, along with aggregated Eurozone flash GDP. There are downside risks for obvious reasons and with the ECB determined to stay dovish, the euro could have a tough end to the week. There is also risk around energy companies breaking sanctions by opening rouble natural gas accounts, and a potential EU ban on Russian oil now that Germany is on board with the idea.

Finally, we need to talk about holidays because there are lots of them. Thanks to the start of Eid Al Fitr and Labour Day, Singapore is on holiday until Wednesday and thus, so am I. Today, Japan is on holiday and Golden Week next week means they are away from Tuesday through Thursday. Most of the Muslim world, including Indonesia and Malaysia, will be away next week for Eid Al Fitr. China is away on Monday through Wednesday, and Hong Kong and the United Kingdom are off for Labour Day on Monday. Many regional Asian markets such as Thailand and South Korea also have holidays next week.

All of that adds up to one thing, some seriously reduced liquidity in financial markets in Asia next week, especially on Monday. China may be on holiday until Thursday, but they are releasing official and Caixin PMIs over the weekend, along with the South Korean Balance of Trade on Sunday. Add in a potentially volatile finish to the week by New York, and any weekend news developments, and with just Japan and Australia at their desks, the scene is set for some potentially ugly volatility on Monday, especially if the China PMI data is poor. Asia also releases a raft of PMIs on Monday as well. Did I mention FOMC, RBA and BOE policy decisions next week? Given the number of countries on holiday on Monday, if I were Japan’s Ministry of Finance, Monday would be an ideal day to quietly add some two-way risk into USD/JPY. ​ Volatility will be the winner next week. I’m glad I am away until Wednesday.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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